Editor Note: This completes a two-part interview of Professor Jack High, profiled yesterday. His interest in business scholarship in the classical-liberal tradition relates to important topics at MasterResource: political capitalism, contra-capitalism, and corporate cronyism.
“There is so much about business practice that is ripe for study by Austrian economics, but it is not a main focus of our present generation of scholars….. I suspect that the study of business practice is an opportunity for enterprising Austrian scholars to make a mark.” (Jack High, below)
Part III: Austrian Economics and Business History
Q. Let’s step back and talk about business history. How did Austrian (or market process) economics overlap with the study of business?
A. Austrian economics from the beginning has realized that market activity is characterized by desire for improvement, and that change is initiated and carried out by the vital few, to use Jonathon Hughes’ term. This focus on striving for improvement, and its resultant process of change, is evident in Austrian economics from Carl Menger onward, and was especially emphasized by Joseph Schumpeter and Ludwig von Mises.
This feature of Austrian economics makes it congenial to the study of business enterprise. So far as I know, Schumpeter, in his Business Cycles, was the only Austrian economist to write business history until your trilogy, now tetralogy, on Enron. But all Austrian economists have accorded enterprise a place of central importance in the history of capitalism and in the enrichment of human life.
Q. Yet business and capitalism have a complicated interrelationship.
A. I don’t wish to be misunderstood, here. Business firms often engage in activities inimical to the well-being of workers and consumers. Business opposition to the free association of workers or to collective bargaining, or business support for tariffs, are examples. But the primary function of business enterprise is to serve its customers as well as resource constraints permit. Continual improvement in the production of goods and services has made life and the pursuit of happiness easier for us than it was for our forbearers.
Economic history, and business history in particular, gives us an appreciation for this. Unless we know their accomplishments, their virtues and faults, the obstacles they faced, their effects on workers, consumers, and investors, we can form no informed judgment on the leaders of business organizations.
Q. Austrian-school economics has a place in business history scholarship.
A. Yes. We can leave this work to others, but Austrian economists are well equipped to form a just estimate of business leaders; we understand entrepreneurship, and we are trained to detect the more remote and less obvious consequences of their actions.
I should add that, to write business history, we need to know something of finance, accounting, marketing, and business strategy, because these subjects are essential to the operation of business enterprise.
Most economists, including Austrians, are not trained in these subjects. And you need to know history and the methods and values of historians. Historians value documentary sources and their interpretation. Historical knowledge, reliance on documents, and interpretation shine through N.S.B. Gras’s Business and Capitalism and Alfred Chandler’s Visible Hand, for example.
Q. And it did not start in recent times ….
A. Right. Economics had its beginnings as a humane discipline. Adam Smith was a moral philosopher, a political scientist, an historian, and a fine writer, as well as an economist.
Typically, economists of the 18th and 19th centuries were steeped in the humanities. After the marginal revolution of the 1870s, economists gradually lost this broader context of their profession. Economics became more a mechanical discipline and less a discipline embedded in moral philosophy, law, history, and politics.
Austrian economists are an exception. Menger, Boehm-Bawerk, Wieser, Schumpeter, Mises, Hayek, Lachmann, Rothbard, Kirzner right through to the present generation, Austrian economists have maintained links to history, law, and moral philosophy.
Q. And that brings us back to your former colleague, Don Lavoie.
A. Don explicitly tried to forge stronger ties between the social sciences and the humanities with his work in hermeneutics and culture. The humanities context of economics is important not simply because history is a part of the humanities, but because economic activity is a part of social life. Most of us judge business activity according to its effects, not only on wealth, but on its overall effects on society, not only on ourselves, but on family, friends, religion, community.
If we think of economics as simply maximizing individual utility or profit, we are apt to lose sight of the social benefits of business. Again, I do not wish to leave the impression that Austrian economists are the only ones to include the humanities in their work. Subdisciplines such as law and economics, philosophy and economics, and economic history explicitly integrate economics and the humanities.
Two of my former colleagues, Jim Buchanan and Gordon Tullock were eminently successful at integrating political philosophy and economics. And a Marxist turned Chicago economist turned moral philosopher, Deirdre McCloskey, has brilliantly explained how business relies on the bourgeois virtues, including faith, hope, and charity. Without a wide and profound knowledge of economic theory, history, and moral philosophy, McCloskey could not have written her Bourgeois trilogy.
Q. Certainly process analysis, the methodological approach of Austrian economists, applies to the creation and evolution of a firm or industry of firms.
A. Absolutely. Carl Menger, in his Principles, explained how money emerges in an economy. I used his theory to explain how other market institutions—private property, the division of labor, and cost accounting—emerge in the same way. I did not apply it to business organization or to the various kinds of capitalism, but when I read the work of Chandler or Gras, I see Menger’s theory at work.
For example, some traveling merchant of the early middle ages gets the idea that he can be more effective by organizing the production and distribution of textiles at home, and sending out agents, rather than undertaking the arduous task of travel himself. He tries out his idea and, sure enough, staying put is more profitable than travel. His success leads him to share his idea with friends and family. Other merchants, observing his success, imitate him.
The new set of sedentary merchants also increases profitability by the practice and they become a new source of sharing and imitation until gradually sedentary merchants replace traveling merchants as the main type of merchant capitalist. The same process is at work when industrial capitalists replace sedentary merchants, or when individual factories are replaced by vertically integrated firms.
Menger’s basic process—entrepreneurship, business success, communication, and imitation—permeates the market economy. Schumpeter made this process the centerpiece of his theory of economic growth, to great effect.
Of course, the same business organization is not the most efficient for all industries. Vertical integration worked well for oil and automobiles, but not for cordage or salt. Continual experimentation, and the discipline of profit and loss, determine ever-changing firm size and market structure.
Q. Best business practices as an area of study, apart from rent-seeking, would seem to have been a natural for Austrian economics? Was it?
A. You are right, it is a natural area of study; best practices will emerge (and change) in the market through entrepreneurship, communication, and imitation. To my knowledge, this has not been studied by Austrian economists, though you, Dick Langlois, Nicolai Foss, Peter Klein or other Austrians studying business organization may have developed this theme.
There is so much about business practice that is ripe for study by Austrian economics, but it is not a main focus of our present generation of scholars. Your own work is an exception, of course, and I hope it has an influence, not only in business history circles, but among current and future generations of economists. I suspect that the study of business practice is an opportunity for enterprising Austrian scholars to make a mark.
Q. Let me end by returning to the interest in this subject by Don Lavoie, who has been mentioned already in this interview. Don, who died in 2001 (age 51) of pancreatic cancer, was David H. and Charles G. Koch Professor of Economics at George Mason University, and he was an influence on both of us.
I acknowledge Don in my forthcoming book, Enron Ascending: The Forgotten Years, 1984–1996 as follows: “Donald Lavoie taught me the value of scholarship in which opposing views are deeply understood, charitably interpreted, and thoroughly evaluated.”
Don to me was the scholar’s scholar. Open-minded, interested, and looking to find common ground with those who might disagree with him.
A. Yes. As a graduate student, Don devoted a lot of time to studying Marxism, and he told me once in an interview that he thought Marx was a great economist. Marx’s flawed value theory led to erroneous views on socialism, but Don’s respect for Marx gave him an appreciation for Marxist scholarship that stayed with him throughout his career. In giving a sympathetic hearing to positions with which he disagreed, Don was carrying on an Austrian tradition evident in Menger, Wieser, Boehm-Bawerk, Mises, Schumpeter, Mises, Hayek. Your acknowledgement to Don expresses well his approach to research.
Q. And he would be pleased with what you and I are doing, trying to resurrect what should be a tradition in applied Austrian Economics.
A. Don was at once theoretical and practical. The unworkability of socialism rests on abstract economic principles but was one of the most pressing and practical policy issues of his day. Don’s research on socialism occurred in the eighties, before the fall of the Soviet Union, and he was one of the few economists arguing that socialism was impractical.
His work on hermeneutics grappled with abstract issues in philosophy but had profound lessons for economic research, stressing the importance of studying economic life through the eyes of its participants. Your work in business history exemplifies this principle of hermeneutics and Don would be pleased indeed with your research.
[…] the Harvard Business School (HBS) tradition. Along with scholar/mentor Jack High (see here and here), I am trying to resurrect this grand standard of business scholarship for future studies of […]
[…] of the real world. His intellectual trespassing benefited from diligence and fairness. I wrote: “Donald Lavoie taught me the value of scholarship in which opposing views are deeply […]